To manage petty cash well, fix a starting balance for the fund, put one person in charge of the box, document every dollar that leaves it with a voucher and receipt, and reconcile on a regular schedule so the cash on hand plus the outstanding vouchers always equal that starting balance. Most small businesses keep between $100 and $500 in the fund, with the right figure driven by how often small expenses actually come up.
Set Up the Fund
Start with the custodian. One employee holds the key, fills out the paperwork, and answers for any shortages. Splitting that role across two or three people is where petty cash systems break down, so keep it to a single name.
Then set the imprest amount, the fixed balance the fund resets to after each replenishment. Look at your small cash purchases over the last six months and work out a monthly average. If the office runs through about $300 a month on postage, parking, and break room supplies, an imprest of $300 to $400 gives the custodian enough runway between replenishments without leaving excess cash sitting around.
To open the fund, write a check for the imprest amount, cash it, and put the currency in a locking cash box or small safe that only the custodian can open. A logbook or tracking spreadsheet goes in the box with the cash so recordkeeping starts the same day. Keep the box locked whenever it is unattended, even for short breaks.
Cap Each Transaction
The fund has a ceiling, and so should each withdrawal from it. Most businesses limit single petty cash transactions to somewhere between $25 and $75. Anything larger runs through the normal purchasing or reimbursement process. Putting that ceiling in writing keeps one big purchase from draining the box and keeps the fund doing what it is meant to do: cover small, routine expenses.
Know What Petty Cash Should and Shouldn’t Cover
Petty cash works for minor, clearly business-related purchases that come up between regular purchasing cycles. Office supplies, postage, parking for a client meeting, a replacement phone charger for the front desk. Small, immediate, not worth a purchase order.
Some things do not belong in the box regardless of amount:
- Employee advances or loans, which create recordkeeping and tax problems when there is no specific business expense attached.
- Payroll of any kind, including wages, bonuses, and contractor payments, which must go through proper payroll channels.
- Personal expenses, even when the employee intends to repay the fund.
- Travel reimbursements, which involve amounts and documentation beyond what petty cash can properly handle.
The IRS will not allow deductions for certain categories no matter how the expense is paid. Fines or penalties for breaking the law, political contributions, entertainment expenses, and personal or family costs are all non-deductible. Paying for them from petty cash does not change that; it just clutters your records.
Document Every Disbursement
The IRS specifically mentions petty cash slips as acceptable supporting documents for small business expenses. Each slip should capture five things: the date, who received the cash, how much was disbursed, what was purchased, and the business purpose. The custodian fills it out at the moment of the transaction, not later from memory.
Receipts
For any petty cash expense of $75 or more, staple an itemized vendor receipt to the voucher. The IRS does not require documentary evidence for non-lodging expenses under $75, but that is not a reason to skip receipts on smaller purchases. A receipt attached to the slip is still the cleanest proof that the money went where the paperwork says it did. Lodging expenses need a receipt regardless of amount.
How Long to Keep the Records
Petty cash slips and their receipts are supporting documents for expense deductions, so they follow the same retention rules as other tax records. Keep them for at least three years after filing the return that includes those expenses.
Replenish the Fund
When an employee needs cash, the custodian fills out a voucher, hands over the money, and drops the completed slip into the box. That voucher stands in for the missing currency. At any moment, cash in the box plus vouchers in the box should equal the imprest amount. This is the equation the whole system rests on, and it should hold every time someone opens the lid.
When the cash runs low, refill. Many custodians trigger replenishment once the fund drops below 20% to 25% of its starting balance. Total the vouchers, submit them to accounting or the business owner, and issue a reimbursement check for that exact total. Cash the check, put the currency in the box, and the fund is back to its imprest amount. The vouchers move to permanent file storage.
The Journal Entries
Two entries matter in the books. When you first establish the fund, debit Petty Cash and credit Cash (checking) for the imprest amount. When you replenish, debit each expense category the vouchers represent (office supplies, postage, and so on) and credit Cash for the total reimbursement. The Petty Cash account itself stays at the same balance after replenishment. It only moves if the business decides to raise or lower the fund size.
Reconcile the Box
Reconciliation is where you prove the math works. Count the physical cash, add up any outstanding vouchers and replenishment checks not yet cashed, and confirm the total equals the imprest amount. If it does, you are done. If it does not, you have a discrepancy to investigate.
Reconcile at least monthly. Weekly is better if transaction volume is high. Record the date of the count, the cash total, and the voucher total on a reconciliation form, and sign or initial it. File the forms where they can be pulled for an audit. Letting them pile up in a desk drawer defeats the point.
One detail that trips people up: reconcile before submitting vouchers for replenishment, not after. Once the vouchers leave the box and fresh cash comes in, you have lost the ability to verify that the pre-replenishment totals were correct. The count has to happen while all the evidence is still in the box.
Handle Shortages and Overages
When the cash-plus-vouchers total does not match the imprest amount, the difference is recorded in an account called Cash Over and Short. A few dollars short is booked as a miscellaneous expense. If the box holds more than expected, which happens when change gets returned after a voucher was already filed, the overage is recorded as miscellaneous revenue. Either way, the discrepancy hits the income statement.
Small, occasional shortages of a dollar or two are normal. Coins get miscounted and stores hand back the wrong change. A pattern of shortages, or a single large one, is different. Log every discrepancy with the date, amount, and any explanation. That paper trail protects the custodian from unfounded suspicion and gives management something to work from if the problem grows.
Build In Internal Controls
Petty cash is one of the easiest assets in a business to steal from, because the amounts are small enough that losses can go unnoticed for months. A few controls prevent most problems.
Separate the Duties
The person handling the cash day-to-day should not also be reconciling the fund and approving replenishments. When one person controls all three, there is no independent check. In a business too small to fully separate the roles, have the owner or a manager review and sign each reconciliation instead of leaving it entirely to the custodian.
Run Surprise Counts
Scheduled reconciliations are predictable, and an employee skimming from the fund can cover a shortage right before a known count. Unannounced spot-checks by a manager or owner, even just two or three times a year, remove that safety net. The point is not to catch someone in the act; it is to make sure everyone knows the fund could be checked at any time.
Require Receipts
Require receipts for every transaction above a low threshold regardless of what the IRS demands. A missing receipt on a $12 purchase is a minor annoyance. A pattern of missing receipts across dozens of transactions is a red flag. Some businesses require a receipt for every petty cash transaction without exception, which removes any ambiguity about what is expected.
Consider a Digital Alternative
Physical petty cash has survived because it works, but it carries built-in risks: theft, lost receipts, and the time cost of manual reconciliation. Prepaid corporate cards and expense management platforms offer many of the same benefits with better tracking. A prepaid card loaded with a set balance functions like a digital petty cash fund. Spending is capped, every transaction generates an automatic record, and reconciliation happens in software.
Digital systems do not remove the need for documentation or approval workflows. They move the process from paper vouchers and a lockbox to an app with real-time transaction feeds. For a business that dips into the cash box twice a month, the traditional system works fine and costs nothing. For a business handling petty cash daily, the time saved on reconciliation alone can justify switching.